ELSS Mutual Funds: Features, Benefits, Taxation and More

What if you could save tax and earn reasonable returns on your investment?

Say hello to the Equity Linked Saving Scheme (ELSS). ELSS mutual funds offer tax exemption of up to INR. 1,50,000 under the section 80C of the IT Act. So while equity instruments encourage your wealth creation, you can also lower your overall tax liability.

Let’s get to know these funds better…

ELSS mutual funds are open-ended equity funds with 3 years of lock-in period. The scheme invests at least 80% of the assets in equity or equity-related instruments. 

The underlying stocks in these funds range across market capitalization (Small-cap, Mid-cap, large-cap) and different sectors. These funds aim to maximize your return on investment while providing tax exemption.

Among all the instruments eligible under section 80C of the IT Act, ELSS funds have the shortest lock-in period.

Investment Instruments Eligible for Tax deduction under 80C of the IT ActLock-in PeriodRisk LevelExpected Returns
ELSS3 yearsHighDepends upon market performance
Tax Saver Fixed Deposit5 yearsLowBetween 6%-8% p.a
National Savings Certificate (NSC)5 yearsLow7.7% p.a. (may change every financial year)
Public Provident Fund (PPF)15 yearsLow7.1% p.a. (may change every financial year)
National Pension System (NPS)Till retirementModerately highDepends upon market performance

ELSS mutual funds are ideal for you if you don’t want to lock your money for a longer horizon. 

Equity-linked savings schemes invest the majority of their assets in equity or equity-related instruments. Therefore, these funds have the potential to deliver superior returns compared to other 80C instruments. Over the long term, these funds can help you build significant wealth. 

By investing at least INR. 1,50,000 in ELSS mutual funds in a financial year, you can claim tax deduction under section 80C of the IT Act. 

ELSS mutual fund managers distribute the fund assets across market capitalization, sectors, and themes. This diverse investment strategy lowers the concentration risks. 

Before you choose the ELSS fund, you must compare its performance against the peers and the benchmark. While a fund’s past performance can give you an idea of how it performed during various economic conditions, it’s not the only measure to judge any fund. Therefore, it is crucial to analyze the rolling returns for accurate performance analysis.

Explore the types of returns on mutual funds

Ensuring the mutual fund aligns with your risk profile and fits in with your financial goals is important. Being an equity-heavy scheme, ELSS funds hold higher risk. 

The fund performance may fluctuate with market movements. Staying invested for a longer horizon, even after the lock-in period is over, can mitigate the risk.

Determine your Risk Profile by taking our risk profiling quiz

The mutual fund factsheet holds all the financial parameters such as the fund’s standard deviation, alpha, beta, Sharpe ratio, etc. These parameters may sound complex, but they make comparing two funds quite easy. 

You can learn how to read a fund factsheet here.

Apart from the fund parameters, the factsheet also contains the investment cost of a fund such as expense ratio, exit load, etc.

You can invest in ELSS mutual funds either via lump sum or SIP. The lump sum amount will be eligible for redemption after 3 years of the lock-in period. However, SIP redemption is different. 

If you start an SIP of ELSS fund, the three-year lock-in period applies to each installment. Let’s take an example of investing INR. 1,50,000 in a financial year in an ELSS fund via monthly SIP of INR. 12,500. 

Each SIP installment will have its own lock-in period of 3 years. 

-The first installment on 1st Jan 2024 will mature on 1st Jan 2027. 

-The second installment on 1st Feb 2024 will mature on 1st Feb 2027. 

-The third installment on 1st Mar 2024 will mature on 1st Mar 2027. 

-And so on…

Therefore, your entire investment will not be eligible for redemption at once. You can redeem eligible installments by raising a request to the mutual fund house. 

Equity-linked Savings Schemes attract equity tax implications after redeeming funds. As the fund has a 3-year lock-in period (more than 12 months), there won’t be any short-term capital gain taxation. 

You will have to pay a 10% long-term capital gain tax on profit exceeding 1 lakhs in a financial year of withdrawal. You don’t have to pay any tax if your profit on ELSS funds is less than 1 lakhs.

ELSS mutual funds are ideal for professionals seeking tax deduction options. By investing INR. 1,50,000 in ELSS funds, you can claim tax deductions under section 80C of the Income Tax Act. 

While PPF, EPF, NPS, and tax-saver FD offer similar tax benefits, the returns could be lower and the lock-in period is higher. ELSS demands only 3 years of commitment in exchange for superior returns and tax exemption. 

Not only will the ELSS fund provide tax benefits but also offers instant diversification across equity markets. You can easily invest a lump sum amount or start a SIP with VNN Wealth. Be sure to evaluate your risk profile by taking our risk profiling quiz.

Equity-Linked Saving Scheme is a popular tax saving instrument. ELSS promotes wealth creation by delivering superior returns compared to other tax-saving schemes and lowering tax liability.

Investors can invest INR. 1,50,000 in an ELSS scheme via lumpsum or via SIP, as per convenience.

Explore various categories of mutual fund schemes here and effortlessly start investing